Is Vulcan Materials Company (VMC) worth $121.32 based on its intrinsic value?

Peter Morris
March 4, 2017

Does the March share price for Vulcan Materials (NYSE:VMC) reflect its intrinsic value? I am going to calculate it now using a method called discounted cash flow or DCF. A discounted cash flow (DCF) analysis represents the net present value (NPV) of projected cash flows to a stock. Don’t get put off by the jargon, the math behind it is actually quite straightforward.

I use what is known as a 2-stage model, which simply means we have two different periods where we need to estimate cash flows. To start off with we need to estimate the next 5 years of cash flows, where possible I use analysts estimates but when these aren’t available I have extrapolated the previous Free Cash Flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past 5 years, but capped to a reasonable level. The sum of these cash flows is then discounted to today’s value.
Vulcan Materials (NYSE:VMC) Intrinsic Value Mar 4th 17

Step by step through the calculation

Note the numbers here are in millions apart from the per share values.

5-year cash flow forecast

2017

2018

2019

2020

2021

Levered FCF (USD, Millions)

$525.80

$672.60

$734.37

$801.80

$875.43

Source

Analyst x2

Analyst x2

Extrapolated @ (9.18%)

Extrapolated @ (9.18%)

Extrapolated @ (9.18%)

Present Value Discounted @ 8.49%

$484.64

$571.41

$575.04

$578.69

$582.36

Present value of next 5 years cash flows: $2,792

After calculating the present value of cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the 1st stage. The Perpetuity Method (Gordon Formula) is used to calculate Terminal Value at an annual growth rate equal to the 10 year government bond rate of (2.5%).

Terminal Value

Terminal Value = FCF2021 × (1 + g) ÷ (Discount Rate – g)

Terminal Value = $875 × (1 + 2.5%) ÷ (8.5% – 2.5%)

Terminal value based on the Perpetuity Method where growth (g) = 2.5%: $14,891

Present value of terminal value: $9,906

The total value or equity value is then the sum of of the present value of the cash flows.

Equity Value

In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number.

Value = Total value / Shares Outstanding ($12,698.32 / 132.36)

Value per share: $95.94

Now when we compare the intrinsic value of 95.94 to the current share price of $121.32 we find Vulcan Materials (NYSE:VMC) is slightly overvalued at the time of writing.

Important assumptions

Now the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Vulcan Materials as potential investors the Cost of Equity is used as the discount rate, not the Cost of Capital (or Weighed Average Cost of Capital/ WACC) which accounts for debt.

In this calculation I’ve used 8.5% and this is based on a Levered Beta of 0.8. I’m not going to go into how I calculate the Levered Beta in detail, I used the ‘Bottom up Beta’ method based on the comparable businesses, I also impose a limit between 0.8 and 2 which is a reasonable range for a stable business. Google this if you want to learn more.

Conclusion

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. Is Vulcan Materials in a healthy financial condition? What is the reason for the share price to differ from the intrinsic value? See our latest FREE analysis to find out!

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE every 6 hours. If you want to find the calculation for another other stock just search here.

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